Socially responsible responsible startups are increasingly important

My old friend Rod Schwatz of ClearlySo has a piece in the Guardian this week about the increasing importance of small social businesses and enterprises (SBEs) to the economy.  It is fashionable to talk about this right now in the aftermath of the credit crunch but SBEs have been of growing importance for a long time now.  As Rod points out the first two large and successful social businesses were The Body Shop here in the UK and Ben & Jerry’s in the US, founded in 1984 and 1978 respectively.

Quoting Rod, SBEs are:

organisations seeking to generate social, ethical and environmental (often described collectively as "social") returns. The social businesses also seek profit, while the social enterprises target social impact – but use entrepreneurial methods to achieve them. What makes SBEs interesting is that they have several factors in their favour that mainstream businesses lack – and they are highly present in the "hot" sectors: green technology, new media and the internet.

For me the big picture here is the underlying shift in consumer thinking in favour of SBEs, both to work for and to buy from, which is in turn a result of the economics of abundance.  Simply put, now that (by and large) we don’t have to worry about things like getting enough to eat, having a roof over our heads and being warm at night our focus shifts towards higher order concerns like fitness, preventative medicine and feeling good about the places where we work and shop.

I’ve written a couple of posts recently about how I see the world looking in 5-10 years and I see this as another in that series.  This one is subtly different though in that it talks about types of companies that will be successful rather than how individual markets will evolve.

The interesting question from my point of view as a VC is the extent to which these businesses will be profit oriented and open to taking money from funds like ours with the objective of generating VC scale returns.

There are two things I want to say in this regard:

  1. Some social entrepreneurs are happy making shareholder returns a key objective alongside their social goals (Body Shop eventually exited to L’Oreal and Ben & Jerry’s to Uniliver) while some want to make to keep singularly focused on the good they are bringing to society.  Both approaches are fine but only the former will work for venture capitalists.  In some ways this is re-stating Rod’s distinction between social businesses and social enterprises.
  2. Rod describes SBEs as having three advantages – consumers prefer to buy from them, people want to work for them (and will often do so for much less), and finally that ‘social’ investors will seek lower returns from their investments in this category.  It is this final point I’m not sure about at scale.  I have no doubt that socially responsible angels will be happy to operate like this, and that they may be joined by some government funds and maybe even some small VC funds.  Going further, as a citizen I’d like to believe that larger scale VC funds could operate in this manner (hell, I’d love to be a partner in one), but I can’t see that happening in the near future.  The facts of the investment world as I see them are that everyone is short on returns (pension funds very publicly so) and that overall returns are the way funds are assessed. For these reasons I can’t see large volumes of capital going into funds that are not designed to maximise returns, whatever their sector.  Moreover, I suspect the consumer love affair with responsible business won’t stretch far enough that people will want to sacrifice the size of their retirement pots to help SBEs succeed.  I am also a little concerned that a VC fund which was deliberately investing to generate lower returns might find it difficult to generate any returns at all – it is hard enough to invest profitably without this additional constraint.

In summary, many things are abundant now, but money isn’t (yet) one of them.  I therefore expect to see many more SBEs flourish and hope to see venture money from our fund and others flow into them, with the caveat that those that take venture money will be run along traditional lines from a shareholder value perspective.